Genpact Limited 2015 Q2 Form 10-Q Summary
Business context and reporting period
Genpact Limited designs, transforms, and runs business operations, including business process outsourcing, information technology, analytics, consulting, finance and accounting, financial services, insurance, regulatory affairs, and industrial asset optimization. The company employs more than 70,000 people in 25 countries and serves hundreds of long-term clients.
This unaudited Form 10-Q covers the three and six months ended June 30, 2015, with comparisons to the comparable 2014 periods. The company reported approximately 216.8 million common shares outstanding at June 30, 2015.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Net revenues | $609.5 million | $561.6 million | 8.5% |
| Gross profit | $243.2 million | $221.5 million | 9.8% |
| Gross margin | 39.9% | 39.4% | Up 50 bps |
| Operating income | $89.4 million | $73.1 million | 22.3% |
| Operating margin | 14.7% | 13.0% | Up 170 bps |
| Net income attributable to shareholders | $62.7 million | $49.0 million | 28.0% |
| Diluted EPS | $0.28 | $0.22 | 27.3% |
| Metric | Six months ended June 30, 2015 | Six months ended June 30, 2014 | Change |
|---|---|---|---|
| Net revenues | $1,196.7 million | $1,089.8 million | 9.8% |
| Gross profit | $472.9 million | $425.4 million | 11.2% |
| Gross margin | 39.5% | 39.0% | Up 50 bps |
| Operating income | $163.4 million | $150.3 million | 8.7% |
| Operating margin | 13.7% | 13.8% | Down 10 bps |
| Net income attributable to shareholders | $107.4 million | $99.6 million | 7.8% |
| Diluted EPS | $0.48 | $0.43 | 11.6% |
Q2 revenue growth was driven primarily by Global Clients and business process outsourcing. Global Client revenue increased 12.0% to $495.0 million, while GE revenue declined 4.4% to $114.5 million. Global Clients represented 81.2% of Q2 revenue versus 78.7% in the prior-year quarter. BPO revenue increased 13.3% to $481.2 million, while IT services revenue declined 6.2% to $128.3 million.
For the first half, Global Client revenue increased 12.6% to $968.5 million, while GE revenue decreased 0.8% to $228.2 million. BPO revenue increased 14.5% to $942.3 million, offsetting a 4.7% decline in IT services revenue to $254.4 million.
Net cash provided by operating activities was $114.6 million in the first half of 2015, compared with $93.1 million in the first half of 2014. Capital expenditures were $30.2 million. Net cash used in investing activities was $57.0 million, including $17.7 million for acquisitions and $9.9 million invested in an equity affiliate. Net cash used in financing activities was $66.7 million. Cash and cash equivalents declined from $461.8 million at December 31, 2014 to $441.8 million at June 30, 2015.
At June 30, 2015, short-term borrowings were $21.5 million, current debt was $39.1 million, and long-term debt excluding the current portion was $756.9 million. Total long-term debt, net of debt issuance costs, was $796.0 million. The company refinanced its prior credit facility in June 2015 with an $800.0 million term loan and a $350.0 million revolving facility, generally bearing interest at LIBOR plus 1.50%. Management stated that the company was in material compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue growth accelerated through Global Clients, large transformational deals, and the Pharmalink regulatory affairs acquisition. Revenue adjusted for foreign exchange increased 11.1% in Q2 and 12.0% for the first half.
- Gross margin improved due to operating efficiencies, improved personnel deployment, lower subcontractor usage in Q2, and favorable foreign exchange, partly offset by wage inflation.
- Q2 operating margin expanded, but first-half operating margin declined slightly because SG&A grew faster than revenue and amortization increased.
- SG&A increased 12.4% in the first half, reflecting investments in sales, relationship management, and subject-matter personnel, as well as wage inflation and professional fees.
- Foreign exchange results improved materially: Q2 included a $7.4 million gain versus a $3.8 million loss in Q2 2014; first-half foreign exchange loss was $0.1 million versus $7.4 million in 2014.
- First-half net income benefited from a lower effective tax rate of 19.7% versus 23.2% in 2014, but was partly offset by higher interest expense, a $10.1 million loss from extinguishment of debt, and a $4.6 million loss from equity-method investments.
- The company repurchased 3.6 million shares for approximately $81.4 million during the first half under a $250 million authorization. It repurchased an additional 1.6 million shares for $34.2 million between July 1 and August 7, 2015.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear quantitative revenue or earnings guidance figure. Management expects cash from operations, cash reserves, and debt capacity to fund operations, growth, expansion, and additional share repurchases.
Management highlighted continued growth in targeted verticals, transformational deals, expanded client-facing capabilities, and rising client concentration at larger revenue levels. During the twelve months ended June 30, 2015, client relationships generating more than $5 million of annual revenue increased to 102 from 85 a year earlier.
- Key risks include client retention and new-client wins, conversion of bookings to revenue, pricing and utilization, employee hiring and attrition, wage inflation, competition, economic conditions, and dependence on U.S. and European clients.
- Foreign exchange exposure is significant, particularly involving the Indian rupee and other operating currencies. The company had foreign exchange derivative contracts with approximately $1.8 billion of aggregate notional principal at June 30, 2015.
- Debt is subject to floating interest rates, credit-rating adjustments, leverage and interest-coverage covenants, and a substantial maturity concentration in 2020.
- GE remained a significant customer, accounting for 19% of first-half revenue and 19% of accounts receivable at June 30, 2015, although GE’s revenue share continued to decline.
- Unusual or nonrecurring items included $10.1 million of accelerated debt-issuance-cost amortization, $2.3 million of Q2 equity-method investment losses, acquisition-related amortization, and gains from changes in acquisition earn-out fair values.
- Contractual obligations totaled approximately $1.18 billion, including $860.4 million of long-term debt obligations, $116.9 million of operating leases, $38.1 million of earn-out consideration, and $99.2 million of other liabilities.
- The company reported no legal proceedings expected to have a material adverse effect and stated that disclosure controls were effective. Management excluded 2015 acquisitions from its internal-control evaluation.
Important facts for investors to verify
- Whether Global Client growth, particularly BPO growth, offsets continued weakness in IT services and declining GE revenue.
- The sustainability of margin improvement after considering wage inflation, expanded sales investments, subcontractor costs, and foreign exchange movements.
- Cash conversion, accounts receivable growth, and the effect of share repurchases and acquisition spending on liquidity.
- Debt refinancing terms, floating-rate exposure, covenant compliance, and the large 2020 debt maturity.
- The ongoing economic contribution and integration costs of the Pharmalink, wealth management, Slovakia, and Japan acquisitions.
- Exposure to GE concentration, foreign exchange volatility, tax uncertainties, earn-out obligations, and the company’s substantial contractual commitments.